Corsetti and Roubini (1991) reported that the government finances of
Greece, Ireland, Italy and the Netherlands did not satisfy the intertemporal budget
constraint (IBC). We re-examine this issue by utilizing a new empirical approach and
extended data set. Structural shifts, an issue which Corsetti and Roubini were unable
to address due to the lack of suitable econometric methods, are tackled. We show that:
(i) government finances of all four countries satisfy the IBC and this finding is robust
to different time horizons; (ii) multiple structural shifts, most of which correspond to
important policy changes, did occur in the fiscal path of these countries; and (iii) the
overall effect of structural shifts has been to strengthen the evidence supporting IBC.
We also find a clear positive Maastricht effect on IBC.